disclosure and transparency rules half-yearly … · 2/5/2017 · president trump’s agenda, and...

Australia and New Zealand Banking Group Limited ABN 11 005 357 522

2 May 2017

DISCLOSURE AND TRANSPARENCY RULES – HALF-YEARLY FINANCIAL REPORT

SUBMISSION

Australia and New Zealand Banking Group Limited (ANZ) – Half-yearly financial

report under the ‘Disclosure and Transparency Rules’ (DTR)

The following attached documents constitute ANZ’s 2017 half-yearly financial report for

the purposes of the disclosure requirements of DTR 4.2:

The Condensed Consolidated Financial Statements and Notes to the Condensed

Consolidated Financial Statements for the half year ended 31 March 2017, Directors’

Report (including matters included by reference) and Directors’ Declaration (as set

out on pages 74 to 102 of ANZ’s Half Year 31 March 2017 Consolidated Financial

Report Dividend Announcement and Appendix 4D);

A description of the principal risks and uncertainties for the remaining six months of

the financial year provided in accordance with DTR 4.2.7 (2); and

A directors’ responsibility statement provided in accordance with DTR 4.2.10 (3)(b).


ANZ’s Half Year 31 March 2017 Consolidated Financial Report Dividend

Announcement and Appendix 4D

This document was separately lodged by ANZ with London Stock Exchange on 2 May

2017. Please refer to pages 74 to 102 of that document for the purposes of this DTR

half-yearly financial report submission.


Principal risks and uncertainties for the remaining six months of the financial

year (DTR 4.2.7 (2))

PRINCIPAL RISKS AND UNCERTAINTIES

1. Introduction

The Group’s activities are subject to risks that can adversely impact its business,

operations and financial condition. The risks and uncertainties described below are not

the only ones that the Group may face. Additional risks and uncertainties that the Group

is unaware of, or that the Group currently deems to be immaterial, may also become

important factors that affect it. If any of the listed or unlisted risks actually occurs, the

Group’s business, operations, financial condition, or reputation could be materially and

adversely affected, with the result that the trading price of the Group’s equity or debt securities could decline, and investors could lose all or part of their investment.

2. Changes in political and general business and economic conditions, including

disruption in regional or global credit and capital markets, may adversely

affect the Group’s business, operations and financial condition

The Group’s financial performance is primarily influenced by the political and economic

conditions and the level of business activity in the major countries and regions in which

it operates or trades, i.e., Australia, New Zealand, Asia Pacific, Europe and the United

States. The Group’s business, operations, and financial condition can be negatively

affected by changes in political and economic and business conditions in these markets.

The economic and business conditions that prevail in the Group’s major operating and

trading markets are affected by domestic and international economic events, political

events and natural disasters, and by movements and events that occur in global financial markets.

For example, the global financial crisis that commenced in 2007 saw a sudden and

prolonged dislocation in credit and equity capital markets, a contraction in global

economic activity and the emergence of many challenges for financial services

institutions worldwide that still persist to some extent in many regions. Sovereign risk

and its potential impact on financial institutions in Europe and globally subsequently

emerged as a significant risk (see risk factor 5 ‘Sovereign risk may destabilise global financial markets adversely affecting all participants, including the Group’).

The impact of the global financial crisis and its aftermath continue to affect regional and

global economic activity, confidence and capital markets. Prudential authorities have

implemented and continue to implement increased regulations to mitigate the risk of

such events recurring, although there can be no assurance that such regulations will be

effective. The global financial crisis has also had a lasting effect on consumer and

business behaviour in the advanced economies. Consumers have acted more cautiously,

while businesses have been reluctant to invest and inflation has remained low. Monetary

authorities responded by introducing zero and near-zero interest rates across most

countries, while the major central banks have taken unconventional steps to support

growth and raise inflation. While some economic factors have recently improved and

some monetary authorities have begun to increase interest rates, lasting impacts from

the global financial crisis and the potential for escalation in geopolitical risks suggest

ongoing vulnerability and potential adjustment of consumer and business behaviour. On

23 June 2016, the United Kingdom voted to leave the European Union in a referendum

and on 29 March 2017 gave notice under Article 50 of the Treaty on European Union to

commence the legal process to end the United Kingdom’s membership in the European

Union. The Group expects there will be an extended period of increased uncertainty and

volatility in the global financial markets while the details of the departure (known as


‘Brexit’) are negotiated. The United Kingdom’s decision to leave the European Union may

adversely affect the Group’s ability to raise medium or long term funding in the

international capital markets. There is potential for further consequences of Brexit to

adversely impact the financial markets. In addition, a series of elections in key Eurozone

countries during 2017, particularly in France and Germany, could heighten risk to the

global business environment and increase market volatility.

Furthermore, since the start of his presidency in the United States in January 2017,

President Donald Trump has outlined a political and economic agenda that, in certain

ways, significantly differs from previous U.S. trade, tax, fiscal, regulatory and other

policies. The extent, implementation and outcome of policy changes resulting from

President Trump’s agenda, and the consequences for global trade, the broader global

economy and financial markets, are uncertain, and may negatively impact the Group.

Other current economic conditions impacting the Group and its customers include

changes in the commercial and residential real estate markets in Australia and New

Zealand (see risk factor 6 ‘Weakening of the real estate markets in Australia, New

Zealand or other markets where the Group does business may adversely affect its

business, operations and financial condition’). The demand for natural resources is also

an important economic influence given that sector is a significant contributor to

Australia’s economy and that sector’s significant exposure to Asia, particularly China and

China’s economic growth (see risk factor 21 ‘An increase in the failure of third parties to

honour their commitments in connection with the Group’s trading, lending, derivatives

and other activities may adversely affect its business, operations and financial

condition’).

Should difficult economic conditions in the Group’s markets eventuate, asset values in

the housing, commercial or rural property markets could decline, unemployment could

rise and corporate and personal incomes could suffer. Also, deterioration in global

markets, including equity, property, currency and other asset markets, could impact the

Group’s customers and the security the Group holds against loans and other credit

exposures, which may impact its ability to recover loans and other credit exposures.

All or any of the negative economic and business impacts described above could cause a

reduction in demand for the Group’s products and services and/or an increase in loan

and other credit defaults and bad debts, which could adversely affect the Group’s business, operations, and financial condition.

The Group’s financial performance could also be adversely affected if the Group were

unable to adapt cost structures, products, pricing or activities in response to a drop in

demand or lower than expected revenues. Similarly, higher than expected costs

(including credit and funding costs) could be incurred because of adverse changes in the

economy, general business conditions or the operating environment in the countries in which the Group operates.

Geopolitical instability, such as threats of, potential for, or actual conflict, occurring

around the world, such as the ongoing unrest and conflicts in Ukraine, North Korea,

Syria, Egypt, Afghanistan, Iraq and elsewhere, as well as the current high threat of

terrorist activities, may also adversely affect global financial markets, general economic

and business conditions and the Group’s ability to continue operating or trading in a

country, which in turn may adversely affect the Group’s business, operations, and financial condition.

Natural and biological disasters such as, but not restricted to, cyclones, floods, droughts,

earthquakes and pandemics, and the economic and financial market implications of such

disasters on domestic and global conditions can adversely impact the Group’s ability to

continue operating or trading in the country or countries directly or indirectly affected,

which in turn may adversely affect the Group’s business, operations and financial

condition. In March 2017, certain of the Group’s customers were affected by Cyclone

Debbie in Queensland and New South Wales. For further discussion in relation to natural


and biological disasters, refer to risk factor 23 ‘The Group may be exposed to the impact

of future climate change, geological events, plant, animal and human diseases, and

other extrinsic events which may adversely affect its business, operations and financial condition’.

Other economic and financial factors or events that may adversely affect the Group’s

performance, and give rise to operational and markets risk are covered in risk factors 13

(‘The Group is exposed to market risk, which may adversely affect its business,

operations and financial condition’) and 14 (‘Changes in exchange rates may adversely

affect the Group’s business, operations and financial condition’).

3. Competition may adversely affect the Group’s business, operations and

financial condition, in the markets in which the Group operates

The markets in which the Group operates are highly competitive and could become even

more so. Factors that contribute to competition risk include industry regulation, mergers

and acquisitions, changes in customers’ needs and preferences, entry of new

participants, development of new distribution and service methods and technologies,

increased diversification of products by competitors, and regulatory changes in the rules

governing the operations of banks and non-bank competitors. For example, changes in

the financial services sector in Australia and New Zealand have made it possible for non-

banks to offer products and services traditionally provided by banks, such as payments,

home loans, and credit cards. In addition, existing companies from outside of the

traditional financial services sector may seek to obtain banking licences to directly

compete with the Group by offering products and services traditionally provided by

banks. In addition, banks organised in jurisdictions outside Australia and New Zealand

are subject to different levels of regulation and some may have lower cost structures.

Increasing competition for customers could also potentially lead to a compression in the

Group’s net interest margins or increased advertising and related expenses to attract

and retain customers.

Digital technologies and business models are changing customer behaviour and the

competitive environment. Emerging competitors are increasingly utilising new

technologies and seeking to disrupt existing business models in the financial services sector.

The Group relies on bank deposits to fund a significant portion of its balance sheet.

Increased competition for deposits could increase the Group’s cost of funding. The Group

competes with banks and other financial services firms for such deposits. To the extent

that the Group is not able to successfully compete for deposits, the Group would be

forced to rely more heavily on other, less stable or more expensive forms of funding, or

to reduce lending. This could adversely affect the Group’s business, prospects, financial

performance or financial condition.

The impact on the Group of an increase in competitive market conditions or a

technological change that puts ANZ’s business platforms at a competitive disadvantage,

especially in the Group’s main markets and products, would potentially lead to a material

reduction in market share and margins, which would adversely affect the Group’s financial performance and position.

4. Changes in monetary policies may adversely affect the Group’s business,

operations and financial condition

Central monetary authorities (including the RBA, the RBNZ, the United States Federal

Reserve, the Bank of England and the monetary authorities in the Asian jurisdictions in

which the Group operates) set official interest rates or take other measures to affect the

demand for money and credit in their relevant jurisdictions. For instance, the U.S.

Federal Reserve increased interest rates in December 2016 and March 2017, though the

Australian Reserve Bank lowered interest rates in May 2016 and August 2016. In


addition, in some jurisdictions, currency policy is also used to influence general business

conditions and the demand for money and credit. These policies can significantly affect

the Group’s cost of funds for lending and investing and the return that the Group will

earn on those loans and investments. These factors impact the Group’s net interest

margin and can affect the value of financial instruments it holds, such as debt securities

and hedging instruments. The measures and policies of the central monetary authorities

can also affect the Group’s borrowers, potentially increasing the risk that they may fail to

repay loans. Changes in interest rates and monetary policy are difficult to predict and may adversely affect the Group’s business, operations and financial condition.

5. Sovereign risk may destabilise global financial markets adversely affecting

all participants, including the Group

Sovereign risk is the risk that foreign governments will default on their debt obligations,

be unable to refinance their debts as and when they fall due or nationalise parts of their

economy. Sovereign risk remains in many economies, including the United States,

United Kingdom, China, Europe and Australia. Should one sovereign default, there could

be a cascading effect to other markets and countries, the consequences of which, while

difficult to predict, may be similar to or worse than those experienced during the global

financial crisis and subsequent sovereign debt crises. Such events could destabilise

global financial markets, adversely affecting all participants, including adversely affecting the Group’s liquidity, financial performance or financial condition.

6. Weakening of the real estate markets in Australia, New Zealand or other

markets where the Group does business may adversely affect its business,


Residential and commercial property lending, together with real estate development and

investment property finance, constitute important businesses to the Group. Major sub-segments within the Group's lending portfolio include:

Residential housing loans, owner occupier and investment; and

Commercial real estate loans.

Declining asset prices could impact customers and counterparties and the value of the

security (including residential and commercial property) the Group holds against loans

which may impair the Group’s ability to recover amounts owing to the Group if

customers or counterparties were to default. Since 2009, the world’s major central banks

have embarked upon unprecedented monetary policy stimulus. The resulting weight of

funds searching for yield continues to drive underlying property markets in the Group’s

core property jurisdictions (Australia, New Zealand, Singapore and Hong Kong). Values

for completed tenanted properties and residential house prices, particularly in metro east coast Australian and New Zealand markets, have steadily risen.

A significant decrease in Australian and New Zealand housing valuations triggered by, for

example, an event or a series of events in the local or global economy or lack of

confidence in market values, could adversely impact the Group’s home lending activities

because borrowers with loans in excess of their property value show a higher propensity

to default and, in the event of such defaults the Group’s security values would be

eroded, causing the Group to incur higher credit losses, which could adversely affect the

Group’s financial performance and condition. The demand for the Group’s home lending

products may also decline due to buyer concerns about decreases in values or concerns

about rising interest rates, which could make the Group’s lending products less attractive to potential homeowners and investors.

Recently, the Australian Bureau of Statistics reported that Australian housing prices rose

4.1% over the quarter ended December 31, 2016, the strongest quarterly growth in

Australian housing prices since the quarter ended June 30, 2015. Additionally, prompted


by Australian housing price appreciation and rising Australian household debt, APRA

introduced a new supervisory measure instructing Australian banks, including the Group,

to limit new residential interest-only mortgages to 30% of total new residential mortgage

lending. Should the Group’s regulators impose further supervisory measures impacting

the Group’s residential lending or if Australian housing price growth subsides or property

valuations decline, the demand for the Group’s home lending products may decrease which may adversely affect the Group’s business, operations and financial condition.

A significant decrease in commercial property valuations or a significant slowdown in

Australia, New Zealand or other commercial real estate markets where the Group does

business could result in a decrease in the amount of new lending the Group is able to

write and/or increase the losses that the Group may experience from existing loans,

which, in either case, could materially and adversely impact the Group’s financial

condition and operations. The Group's portfolio of commercial property interest only

loans, may be particularly susceptible to losses in the event of a decline in property

prices as a result of refinance risk and deteriorating security values. A material decline in

residential housing prices could also cause losses in the Group’s residential build to sell

portfolio if customers who are pre-committed to purchase these dwellings are unable or

unwilling to complete their contracts and the Group is forced to re-sell these dwellings at a loss.

Although the Group reduced the leverage it generally provides for commercial property

developers and investors and tightened its general lending conditions during 2016, the

Group could still be adversely affected by the weakening of real estate markets in Australia, New Zealand or other markets where the Group does business.

7. The Group is exposed to liquidity and funding risk, which may adversely

affect its business, operations and financial condition

Liquidity risk is the risk that the Group is unable to meet its payment obligations as they

fall due (including repaying depositors or maturing wholesale debt) or that the Group has

insufficient capacity to fund increases in assets. Liquidity risk is inherent in all banking

operations due to the timing mismatch between cash inflows and cash outflows.

Reduced liquidity could lead to an increase in the cost of the Group’s borrowings and

constrain the volume of new lending, which could adversely affect the Group’s

profitability. A deterioration in investor confidence in the Group could materially impact the Group’s cost of borrowing, and the Group’s ongoing operations and funding.

The Group raises funding from a variety of sources, including customer deposits and

wholesale funding in Australia and offshore markets to meet its funding obligations and

to maintain or grow its business generally. In times of liquidity stress, if there is damage

to market confidence in the Group or if funding inside or outside of Australia is not

available or constrained, the Group’s ability to access sources of funding and liquidity

may be constrained and it will be exposed to liquidity risk. In any such cases, the Group

may be forced to seek alternative funding. The availability of such alternative funding,

and the terms on which it may be available, will depend on a variety of factors, including

prevailing market conditions and the Group’s credit ratings (which are strongly

influenced by Australia’s sovereign credit rating). Even if available, the cost of these

funding alternatives may be more expensive or on unfavourable terms, which could

adversely affect the Group’s financial performance, liquidity, capital resources and financial condition.

Since the advent of the global financial crisis in 2007, developments in major markets

(including the United States, Europe and China) have adversely affected the liquidity in

global capital markets and increased funding, for significant periods, costs compared with the period immediately preceding the global financial crisis.

More recently, the provision of significant amounts of liquidity by major central banks

globally has helped mitigate near term liquidity concerns, although no assurance can be


given that such liquidity concerns will not return, particularly when this liquidity is

incrementally withdrawn by central banks. Future deterioration in market conditions may

limit the Group’s ability to replace maturing liabilities and access funding in a timely and cost-effective manner necessary to fund and grow the Group’s businesses.

8. Regulatory changes or a failure to comply with regulatory standards, law or

policies may adversely affect the Group’s business, operations or financial

condition

As a financial institution, the Group is subject to detailed laws and regulations in each of

the jurisdictions in which it operates or obtains funding, including Australia, New

Zealand, the United States, Europe and Asia Pacific. The Group is also supervised by a number of different regulatory and supervisory authorities.

The Group is responsible for ensuring that it complies with all applicable legal and

regulatory requirements (including accounting standards) and industry codes of practice in the jurisdictions in which it operates or obtains funding.

Compliance risk arises from these legal, regulatory and internal compliance

requirements. If the Group, or an employee of the Group, fails to comply, the Group may

be subject to fines, other penalties or restrictions on its ability to do business and it may

lose customer confidence and business, which could have a material adverse impact on

the Group. In Australia, an example of the broad administrative power available to

regulatory authorities is the power available to APRA under the Banking Act in certain

circumstances to investigate the Group’s affairs and/or issue a direction to the Group

(such as direction to comply with a prudential requirement, to conduct an audit, to

remove a director, executive officer or employee or not to undertake a transaction).

Other regulators also have the power to investigate the Group. For further information

see Note 41 of ANZ’s 2016 Annual Financial Statements and Note 19 of the 2017 Half

Year Financial Statements.

Recent public scrutiny of banking culture has led to an inquiry by the Australian House of

Representatives Standing Committee on Economics into the four major Australian banks

(including ANZ) focussed on consumer protection and transparency in the banking

sector. A first report of the Committee was issued in November 2016 and a second

report is expected. In addition, in April 2016, public scrutiny of banking culture led to a

proposal by the Australian Labor Party (the political party in opposition to the

government) to establish a Royal Commission to investigate Australian banks.

Regulatory investigations, fines, other penalties or regulator imposed conditions could

adversely affect the Group’s business, reputation, prospects, financial performance or financial condition.

Similar to other financial services providers, the Group faces increasing supervision and

regulation in most of the jurisdictions in which the Group operates or obtains funding. In

particular, the Group must comply with supervision and regulation in the areas of

funding, liquidity, product design and pricing, capital adequacy, conduct and prudential

regulation, cyber-security, anti-bribery and corruption, anti-money laundering and counter-terrorism financing and trade sanctions.

The Group has fully implemented the requirements of the Basel Committee on Banking

Supervision’s (’BCBS’) and APRA’s capital reform packages (and APRA’s implementation

thereof) aimed at implementing Basel 3 and strengthening the resilience of the banking

and insurance sectors. Details of these reforms are contained in APRA’s prudential

standards which implement the Basel 3 capital reforms, and which took effect from 1 January 2013.

In addition to the above, Basel 3 requirements include liquidity reforms. Consistent

therewith, APRA requires the Group to comply with the Liquidity Coverage Ratio (‘LCR’)

requirements with effect from 1 January 2015 and the Group will also be required to

comply with the Net Stable Funding Ratio (‘NSFR‘) requirements, with effect from 1


January 2018. Certain regulators in jurisdictions where the Group has a presence have

also either implemented or are in the process of implementing Basel 3 and equivalent

reforms.

In November 2014, the Financial Stability Board (‘FSB’) issued a consultative document

that defined a global standard for minimum amounts of Total Loss-Absorbing Capacity

(‘TLAC’) to be held by global systemically important banks (‘G-SIBs’), with the objective

of ensuring that G-SIBs have the loss absorbing and recapitalization capacity so that

critical functions continue without requiring taxpayer support or threatening financial

stability. While the Group is not currently subject to TLAC as it is not a G-SIB, should

APRA decide to impose TLAC or similar regulations on the Group, it could increase the

level of regulatory capital that the Group is required to maintain and could adversely

affect the Group’s business, financial performance or financial condition.

Separately, since 2014, the BCBS has also released a number of consultation documents

as part of its reforms aimed at simplifying the measurement of risk-weighted assets and

reducing their variability across banks and jurisdictions. Consultation and finalisation of

these reforms are current and on-going. Any impacts on the Group resulting from these

reforms cannot be determined as final calibration is still to be finalised by the BCBS and

they are also subject to the form of these proposals that APRA will implement in Australia.

In addition, there have also been a series of other regulatory releases from authorities in

the various jurisdictions in which the Group operates or obtains funding that propose

significant regulatory change for financial institutions. This includes proposals for

changes to financial regulations in the United States (including the Dodd-Frank Act and

its Volker Rule) which are under review as a result of an executive order released in

February 2017, changes to senior executive accountability in Singapore and Hong Kong,

more data protection regulations in Europe, the Markets in Financial Instruments

Directive 2 in Europe and amendments to the United Kingdom’s Criminal Finances Bill

(which has extraterritorial reach). United Kingdom and European authorities may also

propose significant regulatory changes as a result of ‘Brexit’, however the scope and timing of any such changes remains uncertain.

The Final Report of the Financial System Inquiry (‘FSI’) (released on 7 December 2014)

which concluded a comprehensive inquiry into Australia’s financial system established by

the Australian Government in late 2013, included a wide-ranging set of

recommendations. The Government has authorised APRA to take forward a number of

the FSI’s recommendations, particularly as they related to the resilience of the financial

system. Key recommendations from the FSI Final Report that may have an impact on regulatory capital levels include:

setting capital standards ensuring that capital ratios of ADI’s are ‘unquestionably

strong’;

raising the average internal ratings-based (‘IRB’) mortgage risk weight to narrow

the difference between average mortgage risk weights for ADIs, which use IRB

models, and those that use standardised risk weights in order to increase competition in mortgage lending;

implementing a framework for minimum loss absorption and recapitalisation

capacity in line with emerging international practice;

developing a common reporting template that improves the transparency and

comparability of capital ratios of ADIs; and

introducing a leverage ratio that acts as a backstop to ADIs’ risk-based capital requirements, in line with Basel 3.

APRA supported the FSI’s recommendation that the capital ratios of ADIs should be

unquestionably strong and, with effect from July 2016, increased the capital

requirements for Australian residential mortgage exposures for ADIs accredited to use

the IRB approach to credit risk (including the Group). In March 2017, APRA announced


that the main policy item for its 2017 agenda is to set the capital standards that will

result in capital ratios necessary for ADIs to meet the FSI’s ‘unquestionably strong’

requirements.

Apart from the announcements mentioned above, APRA has not implemented any of the

other key recommendations in the FSI Final Report to date. However, APRA is expected

to assess the impact of impending BCBS reforms (such as simplifying the measurement

of risk-weighted assets) and to consider other measures relating to financial resilience,

such as liquidity, funding, asset quality, and recovery and resolution planning relating to

the FSI’s recommendations. Accordingly, the final outcome of the FSI, including any

impacts and the timing of these impacts on the Group, remain uncertain. In addition,

there are several ongoing Government enquiries and proposals for new enquiries which

may affect the Group and its business, though the impact of the enquiries and proposals for new enquiries cannot be determined at at this stage.

APRA is currently undertaking several open consultations, including those related

reporting requirements for the countercyclical capital buffer, liquidity measures and

securitisation, as well as other areas of focus. Until these are finalised, the impact to the

Group is unknown. A new APRA prudential framework for ADI counterparty credit risk is

also expected to commence in January 2019 at the earliest.

Regulation is becoming increasingly extensive and complex. Some areas of potential

regulatory change involve multiple jurisdictions seeking to adopt a coordinated

approach. This may result in conflicts with specific requirements of the jurisdictions in

which the Group operates and, in addition, such changes may be inconsistently

introduced across jurisdictions. Changes may also occur in the oversight approach of

regulators. It is possible for example that governments in jurisdictions in which the

Group operates or obtains funding might revise their application of existing regulatory

policies that apply to, or impact, the Group’s business, including for reasons relating to national interest and systemic stability.

Regulatory changes and the timing of their introduction continue to evolve. The nature

and impact of future changes are not predictable and are beyond the Group’s control.

Regulatory change may impact the Group in a range of ways, such as by requiring the

Group to change its business mix, incur additional costs as a result of increased

management attention, raise additional amounts of higher-quality capital (such as

ordinary shares, Additional Tier 1 capital or Tier 2 capital instruments) or retain capital

(through lower dividends), and hold significant levels of additional liquid assets and

undertake further lengthening of the funding base. Further examples of ways in which

regulatory change may impact the Group include: limiting the types, amount and

composition of financial services and products the Group can offer, limiting the fees and

interest that the Group may charge, increasing the ability of other banks or of non-banks

to offer competing financial services or products and changes to accounting standards,

taxation laws and prudential regulatory requirements. Regulatory change could

adversely affect one or more of the Group’s businesses, restrict its flexibility, require it

to incur substantial costs and impact the profitability of one or more business lines. Any

such costs or restrictions could adversely affect the Group’s business, prospects, financial performance or financial condition.

9. The Group is exposed to the risk of significant fines and sanctions in the

event of breaches of law or regulation and law relating to anti-money

laundering, counter-terrorism financing and sanctions

Anti-money laundering, counter-terrorist financing and sanctions compliance have been

the subject of significant regulatory change and enforcement in recent years. The

increasingly complicated environment in which the Group operates across the Asia Pacific

region has heightened these operational and compliance risks. Furthermore, the upward

trend in compliance breaches by global banks and the related fines and settlement sums means that these risks continue to be an area of focus for the Group.


The risk of non-compliance with anti-money laundering, counter-terrorist financing and

sanction laws remains high given the scale and complexity of the Group. A failure to

operate a robust programme to combat money laundering, bribery and terrorist

financing or to ensure compliance with economic sanctions could have serious legal and

reputational consequences for the Group and its employees. Consequences can include

fines, criminal and civil penalties, civil claims, reputational harm and limitations on doing

business in certain jurisdictions. The Group’s foreign operations may place the Group

under increased scrutiny by regulatory authorities, and may increase the risk of a member of the Group breaching applicable rules, regulations or laws.

10. The Group may experience challenges in managing its capital base, which

could give rise to greater volatility in capital ratios

The Group’s capital base is critical to the management of its businesses and access to

funding. Prudential regulators of the Group include, but are not limited to, APRA, RBNZ

and various regulators in the Asia Pacific, United States and United Kingdom. The Group is required by its primary regulator, APRA, to maintain adequate regulatory capital.

Under current regulatory requirements, risk-weighted assets and expected loan losses

increase as a counterparty’s risk grade worsens. These additional regulatory capital

requirements compound any reduction in capital resulting from lower profits in times of

stress. As a result, greater volatility in capital ratios may arise and may require the

Group to raise additional capital. There can be no certainty that any additional capital required would be available or could be raised on reasonable terms.

The Group’s capital ratios may be affected by a number of factors, such as (i) lower

earnings (including lower dividends from its deconsolidated subsidiaries such as those in

the insurance and funds management businesses as well as from its investment in

associates), (ii) increased asset growth, (iii) changes in the value of the Australian dollar

against other currencies in which the Group operates (particularly the New Zealand

dollar and United States dollar) that impact risk weighted assets or the foreign currency

translation reserve and (iv) changes in business strategy (including acquisitions,

divestments and investments or an increase in capital intensive businesses).

APRA’s Prudential Standards implementing Basel 3 are now in effect. Certain other

regulators have either implemented or are in the process of implementing regulations,

including Basel 3, which seek to strengthen, among other things, the liquidity and capital

requirements of banks, funds management entities and insurance entities, though there

can be no assurance that these regulations will have their intended effect. Some of these

regulations, together with any risks arising from any regulatory changes (including those

arising from the requirements of the BCBS or the Australian Government’s response to

the FSI), are described in risk factor 8 ‘Regulatory changes or a failure to comply with

regulatory standards, law or policies may adversely affect the Group’s business,

operations or financial condition’.

11. The Group is exposed to credit risk, which may adversely affect its

business, operations and financial condition

As a financial institution, the Group is exposed to the risks associated with extending

credit to other parties. Less favourable business or economic conditions, whether

generally or in a specific industry sector or geographic region, or natural disasters, could

cause customers or counterparties to fail to meet their obligations in accordance with

agreed terms.

For example, the Group’s customers and counterparties in:

the Australian natural resources sector which is particularly exposed to any

prolonged slowdown in the Chinese economy could be materially and adversely impacted by a decline in natural resource prices;


the Australian State governments have been successful in privatising government

owned assets such as electricity distribution networks, ports, road and rail

networks. The flight of capital towards these investments has driven the values of

these assets to historically high levels relying on long range assumptions to justify

the investments. The value of the capital and profitability of these investments is

vulnerable to interest rate and currency exchange rate movements. Long term

interest rate and currency hedges are provided by banks to manage these risks.

These long term hedge exposures have volatile mark to market characteristics

which are unsupported by collateralised security agreements for out of the money

positions. Counterparty insolvency has scope to expose the Bank to large uncovered derivative liabilities; and

the dairy industry in Australia and New Zealand, which is particularly exposed to

excess milk production from other developed countries being sold into traditional

markets, could be materially and adversely impacted by a decline in commodity prices.

The Group’s customers and counterparties may also be adversely impacted by more

expensive imports due to the reduced strength of the Australian and New Zealand dollars

relative to other currencies.

In addition, in assessing whether to extend credit or enter into other transactions with

customers and/or counterparties, the Group relies on information provided by or on

behalf of customers and/or counterparties, including financial statements and other

financial information. The Group may also rely on representations of customers and

independent consultants as to the accuracy and completeness of that information. The

Group’s financial performance could be negatively impacted to the extent that it relies on information that is inaccurate or materially misleading.

The Group holds provisions for credit impairment. The amount of these provisions is

determined by assessing the extent of impairment inherent within the current lending

portfolio, based on current information. This process, which is critical to the Group’s

financial condition and results, requires subjective and complex judgements, including

forecasts of how current and future economic conditions might impair the ability of

borrowers to repay their loans. However, if the information upon which the assessment

is made proves to be inaccurate or if the Group fails to analyse the information correctly,

the provisions made for credit impairment may be insufficient, which could have a

material adverse effect on the Group’s business, operations and financial condition.

12. The Group is exposed to the risk that its credit ratings could change, which

could adversely affect its ability to raise capital and wholesale funding and

constrain the volume of new lending which may adversely affect the

Group’s business operations and financial condition

The Group’s credit ratings have a significant impact on both its access to, and cost of,

capital and wholesale funding. Credit ratings may be withdrawn, qualified, revised or

suspended by credit rating agencies at any time. The methodologies by which they are

determined may also be revised in response to legal or regulatory changes, market developments or for any other reason.

On 7 July 2016, the Group announced that Standard & Poor’s decision to revise the

outlook on the Commonwealth of Australia to ratings outlook negative, resulted in a

change in the credit rating outlook of ANZ and its strategically important entities, along

with other major Australian banks, from stable to negative. Standard & Poor’s outlook on

the major Australian banks has remained negative, citing increasing economic

imbalances, pressures on sovereign credit quality and potential weakening of sovereign supportiveness.


On 19 August 2016, the Group announced that Moody’s decision to revise Australia’s

macro profile resulted in a change in the outlook for major Australian banks, including

the Group, from stable to negative.

On 8 December 2016, Fitch’s outlook on Australia’s banking sector was revised from

stable to negative but, notwithstanding this revision, Fitch indicated that the ratings of

the major Australian banks, including ANZ, remained on stable outlook. On 7 March

2017, Fitch affirmed the ratings of the major Australian banks, including ANZ, with a stable outlook.

The Group’s credit ratings could be revised at any time in response to a change in the

credit rating of the Commonwealth of Australia.

Credit ratings are not a recommendation by the relevant rating agency to invest in

securities offered by the Group.

In addition, the ratings of individual securities (including, but not limited to, certain Tier

1 capital and Tier 2 capital securities and covered bonds) issued by the Group (and other

banks globally) could be impacted from time to time by changes in the regulatory

requirements for those instruments as well as the ratings methodologies used by rating agencies.

Any future downgrade or potential downgrade to the Group’s credit rating may reduce

access to capital and wholesale debt markets, which could lead to an increase in funding

costs, constraining the volume of new lending and affect the willingness of

counterparties to transact with the Group, which may adversely affect the Group’s

business, operations and financial condition.

13. The Group is exposed to market risk, which may adversely affect its


Market risk is the risk of loss arising from adverse changes in interest rates, currency

exchange rates, credit spreads, or from fluctuations in bond, commodity or equity prices.

For purposes of financial risk management, the Group differentiates between traded and

non-traded market risks. Traded market risks principally arise from the Group’s trading

operations in interest rates, foreign exchange, commodities and securities. The non-

traded market risk is predominantly interest rate risk in the banking book. Other non-

traded markets risks include transactional and structural foreign exchange risk arising

from capital investments in offshore operations, market risk arising from the insurance

business, non-traded equity risk and lease residual value risk. For a further discussion of

market and related risks, see Note to the ANZ 2016 Annual Financial Statements.

14. Changes in exchange rates may adversely affect the Group’s business,


As the Group conducts business in several different currencies, its businesses may be

affected by a change in currency exchange rates. Additionally, as the Group’s annual and

interim reports are prepared and stated in Australian dollars, any appreciation in the

Australian dollar against other currencies in which the Group earns revenues (particularly

to the New Zealand dollar and United States dollar) may adversely affect the Group’s reported earnings.

The Group has put in place hedges to partially mitigate the impact of currency changes,

but there can be no assurance that the Group’s hedges will be sufficient or effective, and any further appreciation could have an adverse impact upon the Group’s earnings.


15. The Group is exposed to operational risk, which may adversely affect its


Operational risk is the risk of loss resulting from inadequate or failed internal processes,

people and systems or from external events. This definition includes legal risk, and the

risk of loss of reputation or damage arising from inadequate or failed internal processes,

people and systems, but excludes strategic risk.

Loss from operational risk events could adversely affect the Group’s financial results.

Such losses can include fines, penalties, loss or theft of funds or assets, legal costs,

customer compensation, loss of shareholder value, reputation loss, loss of life or injury to people, and loss of property and/or information.

Operational risk is typically classified into the risk event type categories to measure and

compare risks on a consistent basis. Examples of operational risk events according to category are as follows:

Internal Fraud: is associated with the Group’s employees acting outside their

normal employment conditions/procedures to create a financial advantage for themselves or others;

External Fraud: fraudulent acts or attempts which originate from outside the

Group, more commonly associated with digital banking, lending, and cards

products. Specific threats include ATM skimming, malware and phishing attacks

and fraudulent applications and transactions, where financial advantage is obtained;

Employment Practices and Workplace Safety: employee relations, diversity and

discrimination, and health and safety risks to the Group’s employees;

Clients, Products and Business Practices: risk of market manipulation, product

defects, incorrect advice, money laundering and misuse or unauthorised disclosure of customer information;

Technology: the risk of loss resulting from inadequate or failed information

technology;

Business Disruption (including systems failures): risk that the Group’s banking

operating systems are disrupted or fail;

Damage to Physical Assets: risk that a natural disaster or terrorist or vandalism

attack damages the Group’s buildings or property; and

Execution, Delivery and Process Management: is associated with losses resulting

from, among other things, process errors made by the Group’s employees caused

by inadequate or poorly designed internal processes, or the poor execution of

standard processes, vendor, supplier or outsource provider errors or failed mandatory reporting errors.

Direct or indirect losses that occur as a result of operational failures, breakdowns,

omissions or unplanned events could adversely affect the Group’s financial results.

16. The Group is exposed to reputational risk, which may adversely affect its


Reputational risk may arise as a result of an external event or the Group’s own actions,

and adversely affect perceptions about the Group held by the public (including the

Group’s customers), shareholders, investors, regulators or rating agencies. The impact

of a risk event on the Group’s reputation may exceed any direct cost of the risk event itself and may adversely impact the Group’s business, operations and financial condition.

Damage to the Group’s reputation may also have wide-ranging impacts, including

adverse effects on the Group’s profitability, capacity and cost of sourcing funding,

increased regulatory scrutiny and availability of new business opportunities. The Group’s


ability to attract and retain customers could also be adversely affected if the Group’s

reputation is damaged, which could adversely affect the Group’s business, operations

and financial condition.

17. The Group may be exposed to conduct-related risks relating to the provision

of advice, recommendations or guidance about financial products and

services, or behaviours which do not appropriately consider the interests of

consumers, the integrity of financial markets and the expectations of the

community, in the course of its business activities

Such risks can result from:

the provision of unsuitable or inappropriate advice (e.g., advice that is not

commensurate with a customer’s needs and objectives or appetite for risk);

the representation of, or disclosure about, a product or service which is inaccurate,

or does not provide adequate information about risks and benefits to customers;

a failure to deliver product features and benefits in accordance with terms,

disclosures, recommendations and/or advice;

a failure to appropriately avoid or manage conflicts of interest;

sales and/or promotion processes (including incentives and remuneration for staff

engaged in promotion, sales and/or the provision of advice);

the provision of credit, outside of the Group’s policies and standards; and

trading activities in financial markets, outside of the Group’s policies and

standards.

The Group is regulated under various legislative regimes in the countries in which it

operates that provide for customer protection in relation to advisory, marketing and

sales practices. These may include, but are not limited to, appropriate management of

conflicts of interest, appropriate accreditation standards for staff authorised to provide

advice about financial products and services, disclosure standards, standards for

ensuring adequate assessment of client/product suitability, quality assurance activities,

adequate record keeping, and procedures for the management of complaints

and disputes. Since September 2014, the Australian Senate Economics References

Committee has been conducting an inquiry into aspects of the financial advice industry,

including unethical or misleading financial advice and compensation processes for consumers impacted by that advice. This inquiry is due to report 30 June 2017.

Inappropriate advice about financial products and services may result in material

litigation (and associated financial costs) and together with the failure to avoid or

manage conflicts of interest, may expose the Group to regulatory actions, restrictions or conditions on banking licences and/or reputational consequences.

18. Disruption of information technology systems or failure to successfully

implement new technology systems could significantly interrupt the Group’s

business, which may adversely affect its business, operations and financial

condition

The Group and its service offerings (including digital banking) are highly dependent on

information systems applications and technology. Therefore, there is a risk that these

information systems applications and technology, or the services the Group uses or is dependent upon, might fail, including because of unauthorised access or use.

Most of the Group’s daily operations are computer-based and information systems

applications and technology are essential to maintaining effective communications with

customers. The Group is also conscious that threats to information systems applications

and technology are continuously evolving and that cyber threats and risk of attacks are

increasing. The Group may not be able to anticipate or implement effective measures to


prevent or minimise disruptions that may be caused by all cyber threats because the

techniques used can be highly sophisticated and those perpetuating the attacks may be

well resourced. The exposure to systems risks includes the complete or partial failure of

information technology systems or data centre infrastructure, the inadequacy of internal

and third-party information technology systems due to, among other things, failure to

keep pace with industry developments and the capacity of the existing systems to

effectively accommodate growth, prevent unauthorised access and integrate existing and future acquisitions and alliances.

To manage these risks, the Group has disaster recovery and information technology

governance in place. However, there can be no guarantee that the steps the Group is

taking in this regard will be effective and any failure of these systems could result in

business interruption, customer dissatisfaction, legal or regulatory breaches and liability

and ultimately loss of customers, financial compensation, damage to reputation and/or a

weakening of the Group’s competitive position, which could adversely impact the Group’s

business and have a material adverse effect on the Group’s operations and financial

condition.

In addition, the Group has an ongoing need to update and implement new information

systems applications and technology, in part to assist it to satisfy regulatory demands,

ensure information security, enhance digital banking services for the Group’s customers

and integrate the various segments of its business. For example, the Group is

considering the release of voice biometrics for customer transactions on mobile devices.

The Group may not implement these projects effectively or execute them efficiently,

which could lead to increased project costs, delays in the ability to comply with

regulatory requirements, failure of the Group’s information security controls or a

decrease in the Group’s ability to service its customers. ANZ New Zealand relies on the

Group to provide a number of information technology systems, and any failure of the Group’s systems could directly affect ANZ New Zealand.

19. The Group is exposed to risks associated with information security

including cyber-attacks, which may adversely affect its financial results

and reputation

Information security means protecting information and information systems from

unauthorised access, use, disclosure, disruption, modification, perusal, inspection,

recording or destruction. As a bank, the Group handles a considerable amount of

personal and confidential information about its customers and its own internal

operations, including in Australia, New Zealand and India. The Group operates in 33

countries and the risks to its systems are inherently higher in certain countries where,

for example, political threats or targeted cyber-attacks by terrorist or criminal

organisations are greater. The Group employs a team of information security experts

who are responsible for the development and implementation of the Group’s Information

Security Policy. The Group also uses third parties to process and manage information on

its behalf, and any failure by such third parties could adversely affect the Group’s

business. The Group is conscious that threats to information systems are continuously

evolving and that cyber threats, including but not limited to, cyber compromise,

advanced persistent threats, distributed denial of service, malware and ransomware

attacks, and the risk of such attacks are increasing, and as such the Group may be

unable to develop policies and procedures to adequately address or mitigate such risks.

Accordingly, information about the Group and/or its clients may be inadvertently

accessed, inappropriately distributed or illegally accessed or stolen. The Group may not

be able to anticipate or to implement effective measures to prevent or minimise damage

that may be caused by all information security threats because the techniques used can

be highly sophisticated and those perpetuating the attacks may be well resourced. Any

unauthorised access of the Group’s information systems or unauthorised use of its

confidential information could potentially result in disruption of the Group’s operations,


breaches of privacy laws, regulatory sanctions, legal action, and claims for compensation

or erosion to the Group’s competitive market position, which could adversely affect the

Group’s financial results and reputation.

20. Unexpected changes to the Group’s license to operate in any jurisdiction

may adversely affect its business, operations and financial condition

The Group is licensed to operate in various countries, states and territories. Unexpected

changes in the conditions of the licences to operate by governments, administrations or

regulatory agencies which prohibit or restrict the Group from trading in a manner that

was previously permitted may adversely impact the Group’s business, operations and

financial condition.

21. An increase in the failure of third parties to honour their commitments in

connection with the Group’s trading, lending, derivatives and other

activities may adversely affect its business, operations and financial

condition

The Group is exposed to the potential risk of credit-related losses that can occur as a

result of a counterparty being unable or unwilling to honour its contractual obligations.

As with any financial services organisation, the Group assumes counterparty risk in

connection with its lending, trading, derivatives, insurance and other businesses where it

relies on the ability of a third party (including reinsurers) to satisfy its financial

obligations to the Group on a timely basis. The Group is also subject to the risk that its

rights against third parties may not be enforceable in certain circumstances.

The risk of credit-related losses may also be increased by a number of factors, including

deterioration in the financial condition of the economy, a sustained high level of

unemployment, a deterioration of the financial condition of the Group’s counterparties, a

reduction in the value of assets the Group holds as collateral, and a reduction in the market value of the counterparty instruments and obligations it holds.

The Group is directly and indirectly exposed to the natural resources sector, including

contractors and related industries. Lower commodity prices, mining activity, demand for

resources, or corporate investment in the natural resources sector may adversely affect

the amount of new lending the Group is able to write, or lead to an increase in lending

losses from this sector. Lower oil prices over 2015 and 2016 have resulted in reduced

investment and increased asset write downs which have flow on effects in the energy

supply chain.

Upstream exploration and production firms and related services operators are currently

the most directly exposed if new project investment is wound back and operations are

rationalised. Services to mining customers are also subject to heightened oversight given

the cautious outlook for the services sector. This industry-specific revenue decline may lead to a broader regional economic downturn with a long recovery period.

Credit losses can and have resulted in financial services organisations realising

significant losses and in some cases failing altogether. Should material unexpected credit

losses occur to the Group’s credit exposures, it could have an adverse effect on the Group’s business, operations and financial condition.

22. The unexpected loss of key staff or inadequate management of human

resources may adversely affect the Group’s business, operations and

financial condition

The Group’s ability to attract and retain suitably qualified and skilled employees is an

important factor in achieving its strategic objectives. The Chief Executive Officer and the

management team of the Chief Executive Officer have skills and reputation that are

critical to setting the strategic direction, successful management and growth of the


Group, and whose unexpected loss due to resignation, retirement, death or illness may

adversely affect the Group’s business, operations and financial condition. If the Group

had difficulty retaining or attracting highly qualified people for important roles,

particularly in times of strategic change, the Group’s business, operations and financial condition could be adversely affected.

23. The Group may be exposed to the impact of future climate change,

geological events, plant, animal and human diseases, and other extrinsic

events which may adversely affect its business, operations and

financial condition

The Group and its customers are exposed to climate related events, including climate

change. These events include severe storms, drought, fires, cyclones, hurricanes, floods

and rising sea levels. In March 2017, certain of the Group’s customers were affected by

Cyclone Debbie in Queensland and New South Wales. The Group and its customers may

also be exposed to other events such as geological events (including volcanic seismic activity or tsunamis), plant, animal and human diseases or a pandemic.

Depending on their severity, events such as these may temporarily interrupt or restrict

the provision of some local or Group services, and may also adversely affect the Group’s

financial condition or collateral position in relation to credit facilities extended to

customers, which may adversely affect the Group’s business operations and financial

condition.

24. The Group is exposed to insurance risk, which may adversely affect its


Insurance risk is the risk of loss due to unexpected changes in current and future

insurance claim rates. In the Group’s life insurance business, insurance risk arises

primarily through mortality (death) and morbidity (illness and injury) risks being greater

than expected and, in the case of annuity business, should annuitants live longer than

expected. In August 2015, the Group ceased to issue home, car and travel insurance and

became a distributor only of these products. Existing insurance policies were transferred

to QBE Insurance Group Limited as they came up for renewal. The only general

insurance risk insured now is a small amount of involuntary unemployment benefits as

part of consumer credit insurance sold in Australia. The Group has exposure to insurance

risk in both its life insurance and general insurance business, which may adversely affect its businesses, operations and financial condition.

25. The Group is exposed to increased compliance costs and the risk of

penalties and regulatory scrutiny with respect to the significant obligations

imposed by global tax reporting regimes which are still evolving

The U.S. Foreign Account Tax Compliance Act (‘FATCA’) requires non U.S. financial

institutions to undertake specific customer due diligence and provide information on

account holders who are U.S. citizens or tax residents to the United States Federal tax

authority, the Internal Revenue Service (‘IRS’) either directly or via local tax authorities.

If the required customer due diligence and provision of account holder information is not

undertaken and provided in a manner and form meeting the applicable requirements,

the Group and/or persons owning assets in accounts with Group members may be

subjected to a 30 percent withholding tax on certain amounts. While such withholding

tax may currently apply only to certain payments derived from sources within the United

States (and, beginning on 1 January 2019, certain gross proceeds from the disposition of

assets that can give rise to such U.S. source payments), no such withholding tax will be

imposed on any payments derived from sources outside the United States that are made prior to 1 January 2019, at the earliest.


In addition to FATCA, the U.S. may require the Group in certain circumstances to

provide certain information to U.S. payers (withholding agents, custodians, etc.)

and the Group may face adverse consequences in case it does not provide such information in compliance with the applicable rules and regulations.

The OECD’s Common Reporting Standard (‘CRS’) provides for the automatic

exchange of (financial account) information (‘AEOI’) in tax matters. Over 100

jurisdictions have committed to implement the CRS. The CRS has already

commenced in a number of countries which the Group has operations including the

Cayman Islands, Hong Kong, India, Singapore, South Korea and the United.

Australia and New Zealand have legislated for the CRS to apply from 1 July 2017

(with government to government exchange of information to take place by

September 2018). Australian and New Zealand financial institutions that do not

fully comply with all the requirements of the CRS will be subject to administrative

penalties. CRS requirements, though generally similar to FATCA, have significant

differences and a higher standard of compliance in many aspects, including

penalties for non-collection of prescribed customer information.

In line with other global financial institutions, the Group has made and is expected to

make significant investments in order to comply with, in all the countries that it operates

in, the extensive requirements of FATCA, the CRS and the various other in-country tax reporting initiatives.

26. The Group may experience changes in the valuation of some of its assets

and liabilities that may have a material adverse effect on its earnings

and/or equity

Under AASs, the Group recognises the following instruments at fair value with changes in fair value recognised in earnings or equity:

derivative instruments, including in the case of fair value hedging, the fair value

adjustment on the underlying hedged exposure with changes in fair value

recognised in earnings with the exception of derivatives designated in qualifying

cash flow or net investment hedges where the change is recognised in equity and released to earnings together with the underlying hedged exposure;

assets and liabilities held for trading;

available-for-sale assets with changes in fair value recognised in equity unless the

asset is impaired, in which case, the decline in fair value is recognised in earnings;

assets classified as held-for-sale where fair value is less than the original carrying

amount; and

assets and liabilities designated at fair value through profit and loss with changes

recognised in earnings with the exception of changes in fair value attributable to

the own credit component of liabilities that is recognised in equity.

Generally, in order to establish the fair value of these instruments, the Group relies on

quoted market prices or, where the market for a financial instrument is not sufficiently

active, fair values are based on present value estimates or other accepted valuation

techniques which incorporate the impact of factors that would influence the fair value as

determined by a market participant. The fair value of these instruments is impacted by

changes in market prices or valuation inputs which could have a material adverse effect on the Group’s earnings.

In addition, the Group may be exposed to a reduction in the value of non-lending related

assets as a result of impairments loss which is recognised in earnings. The Group is

required to assess the recoverability of the goodwill balances at least annually and other

non-financial assets including premises and equipment, investment in associates,

capitalised software and other intangible assets (including acquired portfolio of insurance


and investment business and deferred acquisition costs) where there are indicators of impairment.

For the purpose of assessing the recoverability of the goodwill balances, the Group uses

either a discounted cash flow or a multiple of earnings calculation. Changes in the

assumptions upon which the calculation is based, together with expected changes in

future cash flows, could materially impact this assessment, resulting in the potential write-off of a part or all of the goodwill balances.

In respect of other non-financial assets, in the event that an asset is no longer in use, or

that the cash flows generated by the asset do not support the carrying value, impairment may be recorded.

27. Changes to accounting policies may adversely affect the Group’s financial

position or performance

The accounting policies and methods that the Group applies are fundamental to how it

records and reports its financial position and results of operations. Management must

exercise judgement in selecting and applying many of these accounting policies and

methods so that they not only comply with generally accepted accounting principles but

they also reflect the most appropriate manner in which to record and report on the

Group’s financial position and results of operations. However, these accounting policies

may be applied inaccurately, resulting in a misstatement of the Group’s financial position

and results of operations. In addition, the application of new or revised generally

accepted accounting principles could have a material adverse effect on the Group’s

financial position and results of operations.

In some cases, management must select an accounting policy or method from two or

more alternatives, any of which might comply with the generally accepted accounting

principles applicable to the Group and be reasonable under the circumstances, yet might

result in reporting materially different outcomes than would have been reported under another alternative.

28. Litigation and contingent liabilities may adversely affect the Group’s


From time to time, the Group may be subject to material litigation, regulatory actions,

legal or arbitration proceedings and other contingent liabilities which may adversely

affect the Group’s business, operations and financial condition.

The Group had contingent liabilities as at 31 March 2017 in respect of the matters

outlined in Note 19 to the 2017 Half Year Financial Statements.

Note 19 includes, among other things, descriptions of:

bank fees litigation;

benchmark/rate actions;

regulatory reviews and customer exposures; and

security recovery actions.

In recent years there have been significant increases in the nature and scale of

regulatory investigations and reviews, enforcement actions (whether by court action or

otherwise) and the quantum of fines issued by regulators, particularly against financial

institutions both in Australia and globally. The nature of these investigations and reviews

can be wide ranging and, for example, currently include a range of matters including

responsible lending practices, product suitability, wealth advice, conduct in financial

markets and capital market transactions. During the year, the Group has received

various notices and requests for information from its regulators as part of both industry-

wide and Group-specific reviews. There may be exposures to customers which are

additional to any regulatory exposures. These could include class actions, individual


claims or customer remediation or compensation activities. The outcomes and total costs associated with such reviews and possible exposures remain uncertain.

There is a risk that contingent liabilities may be larger than anticipated or that additional

litigation, regulatory actions, legal or arbitration proceedings or other contingent

liabilities may arise.

There are no governmental, legal or arbitration proceedings (including any such

proceedings which are pending or threatened of which ANZ is aware) that have arisen

since 31 March 2017 up to the date of the 2017 Half Year Financial Statements which

may have a significant effect on the financial position or profitability of ANZ and its subsidiaries taken as a whole.

29. The Group regularly considers acquisition and divestment opportunities,

and there is a risk that the Group may undertake an acquisition or

divestment that could result in a material adverse effect on its business,


The Group regularly examines a range of corporate opportunities, including material

acquisitions and disposals, with a view to determining whether those opportunities will

enhance the Group’s strategic position and financial performance.

Divestments by the Group in the first half of 2017 include entering into agreements to

sell:

majority of its Retail and Wealth businesses in Asia;

20% stake in Shanghai Rural Commercial Bank; and

UDC Finance.

The Group is also considering sale of its life insurance, advice and superannuation and

investments business in Australia.

There can be no assurance that any acquisition (or divestment) would have the

anticipated positive results, including results relating to the total cost of integration (or

separation), the time required to complete the integration (or separation), the amount of

longer-term cost savings, the overall performance of the combined (or remaining) entity,

or an improved price for the Group’s securities. The Group’s operating performance, risk

profile and capital structure may be affected by these corporate opportunities and there

is a risk that the Group’s credit ratings may be placed on credit watch or downgraded if

these opportunities are pursued.

Integration (or separation) of an acquired (or divested) business can be complex and

costly, sometimes including combining (or separating) relevant accounting and data

processing systems, and management controls, as well as managing relevant

relationships with employees, customers, regulators, counterparties, suppliers and other

business partners. Integration (or separation) efforts could create inconsistencies in

standards, controls, procedures and policies, as well as diverting management attention

and resources. This could adversely affect the Group’s ability to conduct its business

successfully and impact the Group’s operations or results. Additionally, there can be no

assurance that employees, customers, counterparties, suppliers and other business

partners of newly acquired (or retained) businesses will remain post-acquisition (or post-

divestment), and the loss of employees, customers, counterparties, suppliers and other business partners could adversely affect the Group’s operations or results.

30. Disruption to electricity markets and gas markets may adversely affect the

Group’s business, operations and financial condition


During 2016 and in the first quarter of 2017, there have been various events in Australia

that have affected retail, commercial and industrial electricity and gas users. These

events include the closure of the Hazelwood coal power station in Victoria, black-outs in

South Australia, export demand for Queensland LNG gas and announcements relating to

energy policy and investment by the Australian federal government and the South

Australian state government.

Some of these events have resulted or are likely to result in higher electricity and gas

prices, as well as disruption to electricity and gas markets. The cost of sustained high

prices may flow through to business and consumers. The potential inability of business

to pass through this cost increase to customers may lead to credit risk associated with

business customers. The impact of higher electricity cost for consumers could lead to

reduced consumption and indirectly impact the demand for goods and services,

contributing to lower business profitability. Higher electricity costs may also increase the

CPI and influence upward adjustments to interest rate settings.

These effects may adversely affect the Group’s customers or the Group’s collateral

position in relation to credit facilities extended to such customers, which may adversely

affect the Group’s business, operations and financial condition.


Responsibility statement of the Directors in relation to ANZ’s half-yearly

financial statements made in accordance with DTR 4.2.10 (3)(b)

The Directors of Australia and New Zealand Banking Group Limited confirm to the best of

their knowledge that:

The ANZ’s half-yearly financial report for the half year ended 31 March 2017 (as defined

on page 1 of this DTR half-yearly financial report submission) includes a fair review of:

(i) an indication of the important events that have occurred during the first six

months of the financial year, and their impact on the Condensed Consolidated

Financial Statements; and

(ii) a description of the principal risks and uncertainties for the remaining six months

of the financial year.

Signed in accordance with a resolution of the Directors.

David M Gonski, AC Shayne C Elliott

Chairman Director

1 May 2017

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